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ArcelorMittal has crossed an important hurdle in its quest for insolvent Essar Steel Ltd. The Ahmedabad bench of the National Company Law Tribunal approved ArcelorMittal's resolution plan which entails payment of Rs 42,000 crore to financial creditors. Though this was challenged by the Ruias, Essar’s promoter, at the appellate tribunal, the NCLAT refused to stay the NCLT order. So far that bodes well for ArcelorMittal.

But several observations in the NCLT order and during hearings at NCLAT may require Essar Steel's committee of creditors to reconsider the allocation towards Standard Chartered Bank and also operational creditors.

Experts told BloombergQuint that while the tribunals’ comments are ‘suggestions’, if the creditors' committee accepts them, it will set a bad precedent.

ArcelorMittal’s Plan: Key Objections

NCLT and NCLAT's observations are in the context of applications made by financial creditor Standard Chartered Bank and 40 operational creditors of Essar Steel.

Standard Chartered Bank had stated that against its admitted claim of Rs 3,487 crore, the resolution plan has allocated only Rs 60 crore to it- that works out to be a 1.7 percent recovery. Compare this to other financial creditors whose recovery rate is as high as 92 percent, it pointed out. And so, Standard Chartered Bank argued that the inspite of being a secured financial creditor, it is being discriminated against by the majority members on the CoC.

The discrimination, it argued, stems from the apportionment formula adopted by the CoC- dues weren't being paid based on the proof of admitted claim on pro-rata basis but instead were being determined on the value of security possessed relative to the liquidation value of the company's assets. the bank further stated that if a pro-rata method were to be adopted and each secured financial creditor given 85.6 percent of its claim, that would ensure a reasonable and fair apportionment of the amount.

The pro rata allocation suggested by Standard Chartered Bank looks like this when compared to the current allocation by the CoC -

In the same vein, some 40 operational creditors too had complained of inequitable treatment. The NCLT order notes that a few operational creditors with debt value of Rs 1 crore are getting nil amount and others with debt value of Rs 4,700 crore are only getting Rs 197 crore.

Equitable Treatment vs Commercial Wisdom

The NCLT pointed out that the allocation to Standard Chartered Bank and operational creditors is not only unequitable but discriminatory as well. Had the CoC adopted some other fair formula - by reducing their percentage of apportionment on pro rata basis - the maximum debt of almost all creditors would stand satisfied, it explained.

And so, the NCLT advised the creditors' committee that it should allocate 85 percent of the total amount - Rs 42,000 - on a pro-rata basis to all financial creditors. The remaining 15 percent - Rs 6,300 crore - can be distributed among operational creditors. In framing this as advice and not an order the NCLT also recognised that limitation on judicially reviewing a commercial decision taken by the creditors' committee.

During the appeal hearings on Friday, the NCLAT too directed the CoC to reconsider the amount being allocated to financial and operational creditors. The appellate tribunal also observed that there cannot be any discrimination between secured creditors. It asked the CoC to convene a meeting to reconsider distribution among financial creditors and also consider allocating 10 percent of the amount for clearing dues of operational creditors.

The Supreme Court, in the Sashidhar case order, clearly stated that the tribunals don’t have the jurisdiction to reverse the commercial wisdom of the creditors’ committee, Ajay Shaw, an insolvency law partner at DSK Legal, pointed out. So this (NCLT and NCLAT advice) can’t be read as a legal whip, he added.

Technically, after a plan is approved, the CoC ceases to function. If I have to take a conservative view, the CoC can reassemble but what can they do differently or are required to do differently under the law? If the CoC gets swayed, they will be giving it a color of mandatory direction when it’s not that.

Ajay Shaw, Partner, DSK Legal

This in itself will set a bad precedent - what intelligible differentia will CoCs apply to account for such directions in some cases and not in the others, he added.

The formula that the NCLT has suggested to the CoC to reconsider allocation between secured creditors could effectively mean that sensible credit calls taken by lenders at the time of lending are placed in the same bucket as poor credit calls by other lenders when an IBC restructuring occurs, Nilang Desai, partner at law firm AZB & Partners, told Bloombergquint.

This is worrying and could have much wider repercussions. Not all secured creditors can be treated equally and the allocation should be on the basis of security they possess. Let’s say one secured creditor has land and machinery- with 2x cover- and the other has perishable inventory as security- with 0.2x cover - should they really be paid out equally?

Nilang Desai, Partner, AZB

The CoC will be well-advised to appeal against the suggestions made by the NCLT and NCLAT, he added.

At the NCLAT hearing, senior advocate Harish Salve argued on behalf of ArcelorMittal and said the company does not have any opinion on distribution of claims but as far as its offer is concerned, it cannot be increased anymore.

“To any concerns that the CoC may have, this is our offer- Rs 42, 000 crore for financial creditors, Rs 197 crore for certain operational creditors, Rs 18 crores for employees and a working capital infusion of around Rs 8,000cr. They are free to reject it. We are not concerned with the distribution and have no role in distribution. Our money is also stuck,” Salve said.

The appellate tribunal also expressed its concern over the timeline of the case which has gone much beyond the 270 day deadline. ‘Our reputation is also at stake because of this case. It has taken more than 500 days. We will decide the matter expeditiously,” the NCLAT Chairperson said.